Arrow Capital Management Inc. et al.

Headnote

One time trade of securities between pooled funds, both advised by the same portfolio manager, to implement a merger -- costs of the merger borne by the manager -- sale of securities exempt from the self-dealing prohibitions in paragraph 13.5(2)(b)(iii), National Instrument 31-103 -- Registration Requirements and Exemptions.

Applicable Legislative Provisions

National Instrument 31-103 Registration Requirements and Exemptions, ss. 13.5(2)(b)(iii), 15.1.

August 14, 2014

IN THE MATTER OF THE SECURITIES LEGISLATION OF ONTARIO (the Jurisdiction) AND IN THE MATTER OF THE PROCESS FOR EXEMPTIVE RELIEF APPLICATIONS IN MULTIPLE JURISDICTIONS AND IN THE MATTER OF ARROW CAPITAL MANAGEMENT INC. (the Filer) AND ARROW HIGH YIELD FUND (the Terminating Fund) AND RAVEN ROCK INCOME II FUND (the Continuing Fund, and together with the Terminating Fund, the Funds)

DECISION

Background

The principal regulator in the Jurisdiction has received an application from the Filer, on its own behalf and on behalf of the Funds, in order to effect the proposed merger (the Merger) of the Terminating Fund into the Continuing Fund, for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation) for an exemption from the provisions of subclause 13.5(2)(b)(iii) of National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103), which prohibits a registered adviser from knowingly causing an investment portfolio managed by it, including an investment fund for which it acts as an adviser, to purchase or sell a security from or to the investment portfolio of an investment fund for which a responsible person acts as an adviser (the Exemption Sought).

Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a passport application):

(a) the Ontario Securities Commission is the principal regulator for this application; and

(b) the Filer has provided notice that section 4.7 of Multilateral Instrument 11-102 Passport System (MI 11-102) is intended to be relied upon in British Columbia, Alberta, Saskatchewan, Manitoba, Quebec, New Brunswick, Nova Scotia, Newfoundland and Labrador, Prince Edward Island, Northwest Territories, Nunavut and Yukon.

Interpretation

Terms defined in National Instrument 14-101 Definitions and MI 11-102 have the same meaning in this decision unless they are defined in this decision.

Representations

This decision is based on the following facts represented by the Filer:

The Filer

1. The Filer acts as manager and portfolio manager of the Terminating Fund and the Continuing Fund.

2. The Filer is registered as investment fund manager, portfolio manager, commodity trading manager and exempt market dealer in the Province of Ontario; as exempt market dealer in British Columbia and Alberta; as exempt market dealer and investment fund manager in Quebec; and as investment fund manager in Newfoundland and Labrador.

3. The Filer is not in default of securities legislation in any jurisdiction.

The Funds

4. Each of the Terminating Fund and Continuing Fund is an open-end mutual fund trust established under the laws of Ontario. The Funds are not reporting issuers in any jurisdiction and are not subject to National Instrument 81-102 Mutual Funds.

5. Each Fund offers its units in all provinces and territories of Canada pursuant to available prospectus exemptions in accordance with National Instrument 45-106 Prospectus and Registration Exemptions.

6. The Funds are not in default of securities legislation in any jurisdiction.

7. Raven Rock Capital Management Inc. (Raven Rock) is a portfolio sub-advisor to the Filer in respect of each of the Funds.

8. The Filer has decided to effect the Merger because of the similarities in the Funds' investment portfolios and the desire to have Raven Rock focus on one investment objective and strategy.

The Merger

9. Unitholders of the Terminating Fund approved the Merger at a special meeting of unitholders held on July 30, 2014 (the Meeting). In connection with the Meeting, the Filer sent the unitholders of the Terminating Fund a notice of meeting, management information circular and a related form of proxy (collectively, the Meeting Materials). It is proposed that the Merger will occur on or about August 15, 2014 (the Effective Date), subject to regulatory approvals, where necessary and in any event no later than September 30, 2014.

10. As a result of the Merger, there will be no change in management fees or performance fees paid by unitholders of the Terminating Fund.

11. No redemption fees, other fees or commissions will be payable by the Funds' unitholders in connection with the Merger. No sales charges will be payable in connection with the acquisition by a Continuing Fund of the investment portfolio of the Terminating Fund.

12. Units of the Continuing Fund and Terminating Fund are sold without sales charges.

13. The costs associated with the Merger will be paid by the Filer.

14. Unitholders of the Terminating Fund will be able to redeem their units at all redemption dates both prior and after the Merger.

15. Although the investment objective of the Continuing Fund is different from that of the Terminating Fund, both Funds primarily invest in fixed income securities. The portfolio of assets of the Terminating Fund to be acquired by the Continuing Fund arising from the Merger will be acceptable to the sub-advisor of the Continuing Fund and will be consistent with the investment objectives of the Continuing Fund.

16. The Continuing Fund will have valuation procedures that are identical to the valuation procedures of the Terminating Fund.

17. The following steps will be carried out to effect the Merger:

(a) the value of the Terminating Fund's investment portfolio and other assets will be determined at the close of business on the effective date of the Merger in accordance with its trust indenture;

(b) any securities in the investment portfolio of the Terminating Fund which do not conform to the investment objective and strategies of the Continuing Fund will be sold in the market for cash;

(c) to facilitate the issuance of units of the Continuing Fund to the Class A, F, U and G unitholder of the Terminating Fund, the Filer, as trustee, will amend the trust indenture of the Continuing Fund to authorize the Continuing Fund to issue Class AI, FI, UI and GI Units, which will have the same terms and fees as the existing classes of the Terminating Fund. The Continuing Fund already is authorized to issue Class I Units so no amendment to the trust indenture of the Continuing Fund is required for the issuance of units of the Continuing Fund to the Class I unitholder of the Terminating Fund.

(d) the Continuing Fund will acquire the portfolio assets and other assets of the Terminating Fund in exchange for units of the Continuing Fund;

(e) the Continuing Fund will not assume the liabilities of the Terminating Fund and the Terminating Fund will retain sufficient assets to satisfy its estimated liabilities, if any, as of the date of the Merger;

(f) the units of the Continuing Fund received by the Terminating Fund will have an aggregate net asset value equal to the value of the Terminating Fund's portfolio assets and other assets that the Continuing Fund is acquiring, which units will be issued at the applicable net asset value per security as of the close of business on the effective date of the Merger;

(g) if necessary, the Terminating Fund will distribute a sufficient amount of its income and capital gains, if any, to ensure that the Terminating Fund will not be liable for income tax under Part I of the Income Tax Act (Canada), other than alternative minimum tax, for its current taxation year. Currently, it is expected that there will not be any distributions from the Terminating Fund;

(h) immediately thereafter, the units of the Continuing Fund received by the Terminating Fund will be distributed to unitholders of the Terminating Fund on a dollar-for-dollar basis in exchange for their units in the Terminating Fund, whereby Class A, F, I, U and G Units of the Terminating Fund will be exchanged for Class AI, FI, I, UI and GI Units of the Continuing Fund, respectively; and

(i) as soon as reasonably possible following the Merger, the Terminating Fund will be wound up.

18. The assets of the Funds will be valued in accordance with the valuation policies and procedures outlined in the trust indenture of each Fund, and, at this value, the assets of the Terminating Fund will subsequently be exchanged for units of the Continuing Fund as described above.

19. The transfer of the assets of the Terminating Fund to the Continuing Fund will not adversely impact the liquidity of the Continuing Fund.

20. The Filer believes that the Merger is in the best interests of unitholders of the Funds for the following reasons:

(a) the Merger will eliminate duplication because of the similarities in the investment portfolios of the Terminating Fund and the Continuing Fund;

(b) the Merger will enable Raven Rock to focus on one investment objective and strategy;

(c) the Merger will eliminate duplicative administrative and regulatory costs of operating the Terminating Fund and the Continuing Fund as separate mutual funds;

(d) following the Merger, the Continuing Fund will have more assets allowing for increased portfolio diversification opportunities and a smaller proportion of assets set aside to fund redemptions; and

(e) there will be a savings in brokerage charges through a merger rather than liquidating the portfolio of securities of the Terminating Fund.

21. The desired end result of the Merger could be achieved by each unitholder redeeming his/her units of the Terminating Fund and using the proceeds to purchase units of the Continuing Fund. Executing the trades in this manner could result in taxation of the redemption proceeds received by the unitholder as well as negative consequences to the Terminating Fund and the Continuing Fund through the incurrence of unnecessary brokerage charges relating to the sale and repurchase of portfolio securities.

22. The Merger will be completed on a tax-deferred basis.

23. The portfolio securities and other assets of the Terminating Fund will be transferred from the Terminating Fund to the Continuing Fund in accordance with the steps described above. Because the transfer of portfolio securities and assets will take place at a value determined by common valuation procedures and the issue of units will be based upon the relative net asset value of the portfolio securities and other assets received by the Continuing Fund, it is the Filer's submission that any potential conflict of interest has been adequately addressed and as a result there is no conflict of interest for the Filer in effecting the Merger.

24. The sale of the assets of the Terminating Fund to the Continuing Fund (and the corresponding purchase of such assets by the Continuing Fund) as a step in the Merger may be considered a purchase or sale of securities, knowingly caused by a registered adviser that manages the investment portfolios of both Funds, from the Terminating Fund to, or by the Continuing Fund from, an investment fund for which a "responsible person" acts as an adviser, contrary to sub-paragraph 13.5(2)(b)(iii) of NI 31-103.

25. Unless the Exemption Sought is granted, the Filer would be prohibited from knowingly causing the purchase and sale of securities of the Terminating Fund (and thereby transferring its assets to the Continuing Fund) in connection with the Merger.

Decision

The principal regulator is satisfied that the decision meets the test set out in the Legislation for the principal regulator to make the decision.

The decision of the principal regulator under the Legislation is that the Exemption Sought is granted provided that, prior to completion of the Merger, the board of directors of the Manager determines that the Merger is in the best interests of the Funds and approves the Merger.

"Darren McKall"

Manager,

Investment Funds and Structured Products Branch

Ontario Securities Commission